What is a leasehold extension?

A leasehold extension is the process of extending the lease term of a property held on a leasehold basis. It helps maintain the property's value and desirability. Leasehold extension legislation allows leaseholders to extend their lease, ensuring the property remains attractive for sale or mortgage purposes.

How long is a leasehold extension ?

The length of a leasehold extension can vary depending on the jurisdiction and specific circumstances. In some countries, such as the United Kingdom, leasehold extensions are typically granted for an additional 90 years beyond the remaining term of the existing lease. However, it's important to note that leasehold extension regulations can differ, and it's advisable to consult local laws or seek professional advice like leasehold valuations for accurate information regarding leasehold extensions in a specific jurisdiction.

What are the benefits of lease extension ?

Extending the leasehold of a property offers benefits such as increased property value, improved marketability, easier access to mortgage financing, peace of mind and security, the avoidance of escalating costs, and more control over property management.

What happens to leasehold property after 99 years ?

After 99 years, the leasehold property typically reverts back to the freeholder, unless the lease is extended by the leaseholder. The ownership of the property, along with the land it is built on, returns to the freeholder once the lease expires. As a lease approaches its expiration, the property’s value may decrease, making it more challenging to sell or mortgage. It is advisable for leaseholders to consider extending their lease well before it reaches the 99-year mark to maintain the property’s value and their ownership rights.

Why choose leasehold Valuations for Lease extension or Buying Freehold ?

1. Fair Price: A leasehold valuation ensures you pay a fair price for a lease extension or freehold purchase.2. Increased Property Value: Extending the lease or buying the freehold can potentially increase your property’s value.3. Cost Savings: Accurate valuation helps minimise future costs like ground rent.4. Stronger Negotiation: A valuation report strengthens your position during negotiations with landlords.5. Legal Compliance: Valuations ensure you meet legal requirements for lease extensions or freehold purchases.6. Future Planning: Valuations help you plan for selling or passing on the property to future generations.7. Expert Advice: Engaging a valuer provides access to their expertise and guidance.8. Mortgage Support: Valuation reports improve your mortgage opportunities for lease extensions or freehold purchases.

How much does it cost to renew a leasehold ?

The cost of renewing a leasehold in the UK can vary depending on various factors, such as the property value, the length of the renewal term, and any negotiations between the leaseholder and the freeholder. Unlike extending a lease, which typically involves paying a premium to the freeholder, renewing a lease generally involves paying a nominal fee known as a “peppercorn rent” or a small percentage of the property value.The exact cost of renewing a leasehold will depend on the specific terms agreed upon between the parties involved. It is advisable to consult with a solicitor or a licenced conveyancer who specialises in leasehold matters to get an accurate estimate of the costs involved based on your particular situation.

Q. How much does it cost to extend a leasehold in uk ?

The cost of extending a leasehold in the UK can range from a few thousand pounds to tens of thousands of pounds, depending on factors such as the remaining lease length, property value, and negotiated terms with the freeholder. Additional costs include legal fees, valuation fees, and disbursements such as Land Registry fees. It’s recommended to seek professional advice for an accurate estimate based on your specific situation.

Calculating Lease Extension Premiums and Marriage Value

June 11, 2020

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Lease extensions play a crucial role in maintaining and maximizing the value of leasehold properties. When considering a lease extension, it is essential to understand how the premium is calculated and the concept of marriage value. In this comprehensive guide, we will delve into the parameters used to determine the premium, the significance of the valuation date, and how marriage value affects the overall compensation for both leaseholders and freeholders.

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Calculating the Premium

The Capitalization Rate:

The capitalization rate is a critical parameter used in premium calculations. It is the rate at which future ground rents payable by the leaseholder are discounted to present value. A lower capitalization rate results in a higher premium and vice versa.

The Deferment Rate:

The deferment rate is another vital element in the premium calculation. It is the rate at which the value of the property is discounted to present value. The deferment rate considers factors like the remaining lease term and future potential of the property.

The Relativity:

The relativity is the ratio of the property’s value with a short lease term to its value with a long lease term. It is crucial in determining the premium, especially in cases where the lease term is shorter.

Ground Rents:

The premium calculation takes into account the ground rents payable throughout the existing lease term. The frequency of ground rent changes is considered to arrive at an accurate premium amount.

Understanding the Valuation Date

Importance of the Valuation Date:

The valuation date is the date on which the leaseholder serves the section 42 notice to the landlord for a lease extension. It determines the remaining lease length and is critical in assessing the marriage value, particularly when it approaches or drops below 80 years.

80-Year Threshold and Marriage Value:

When the remaining lease term drops below 80 years, the landlord becomes eligible to claim marriage value in addition to the premium. Marriage value is the difference between the property’s value before and after the lease extension. It is shared between the freeholder and leaseholder, with the leaseholder receiving 50%.

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Calculating Compensation for Lease Extension

Total Value Calculation:

The purpose of the valuation is to determine how much compensation the leaseholder needs to pay to all superior interests for the loss they incur due to the lease extension. This compensation allows the leaseholder to extend their lease by 90 years and reduce the ground rent to negligible amounts.

Discounted Ground Rents:

The ground rents are discounted using the capitalization rate to assess the investment value for superior interests. This calculation accounts for the financial loss they may incur due to the lease extension.

Deferment Rate for Freehold Value:

The freehold value of the flat is discounted using the deferment rate, considering factors like the property’s market potential and other property-specific aspects.

Example of Lease Extension Premium and Marriage Value Calculation:

Let’s consider a hypothetical scenario where a leaseholder, Sarah, wants to extend her lease, and the remaining lease term is 85 years. The ground rent payable is £200 per year, and the property’s value with a short lease term (85 years) is estimated at £400,000. The relativity factor is 0.9, and the capitalization rate is 5%. The deferment rate is 6%.

Step 1: Premium Calculation

Calculate Discounted Ground Rent:

Discounted Ground Rent = Annual Ground Rent / (1 + Capitalization Rate)^Number of Years

Discounted Ground Rent = £200 / (1 + 0.05)^85 ≈ £40.66 per year

Calculate Freehold Value with Long Lease Term:

Freehold Value = Property Value with Long Lease Term / (1 + Deferment Rate)^Number of Years

Freehold Value = £400,000 / (1 + 0.06)^85 ≈ £54,852.21

Calculate Total Premium:

Total Premium = (Freehold Value – Discounted Ground Rent) x Relativity

Total Premium = (£54,852.21 – £40.66) x 0.9 ≈ £49,348.80

Step 2: Marriage Value Calculation

Calculate Property Value with Long Lease Term:

Property Value with Long Lease Term = Property Value with Short Lease Term / Relativity

Property Value with Long Lease Term = £400,000 / 0.9 ≈ £444,444.44

Calculate Freehold Value Before Extension:

Freehold Value Before Extension = (Annual Ground Rent x Number of Years) / (Deferment Rate x (Number of Years + 1))

Freehold Value Before Extension = (£200 x 85) / (0.06 x (85 + 1)) ≈ £141,414.14

Calculate Marriage Value:

Marriage Value = Property Value with Long Lease Term – Freehold Value Before Extension

Marriage Value = £444,444.44 – £141,414.14 ≈ £303,030.30

Step 3: Apportionment of Marriage Value

Sarah (Leaseholder) receives 50% of Marriage Value: 50% of £303,030.30 ≈ £151,515.15 Freeholder receives 50% of Marriage Value: 50% of £303,030.30 ≈ £151,515.15

Conclusion:

In this example, the premium payable by Sarah for the lease extension is approximately £49,348.80. Additionally, the marriage value of the lease extension is approximately £303,030.30, which is shared equally between Sarah and the freeholder, resulting in Sarah paying £151,515.15 as her portion of the marriage value.

Lease extension calculations can be complex, and it is crucial to seek professional advice from experts in leasehold valuations to ensure accurate assessments and fair negotiations. Understanding the calculations involved empowers leaseholders like Sarah to make informed decisions and secure the long-term value of their leasehold properties.